Good Riddance, Mary Schapiro?

Lauded by some, others see the departing SEC Chair as having been wholly ineffectual.

Professor Lawrence G. Baxter of the Duke University School of Law focuses his teaching and scholarly research on the "evolving regulatory environment for financial services and beyond." In the "wake of the serious lapses preceding the Crisis," he says that "the SEC still needs to re-establish its credibility as meaningful guardian of open, fair, and transparent markets."

"I am not sure that Mary Shapiro fully succeeded in restoring the agency's former prowess," he tells me. "At the same time, I also agree with those who point out that Congress has effectively double-crossed the SEC by giving it greater responsibilities under Dodd-Frank and then denying it the necessary funds to perform these responsibilities."

Indeed, this is a serious issue -- Bart Naylor points out that JPMorgan Chase (NYSE:JPM) "spends as much on computer updates every year as the SEC does every few years."

"There are 4,000 SEC employees; there are 35,000 New York City police officers," he explains. "The SEC isn't even in the ballpark of having enough 'cops on the beat.'"

On the other hand, Professor Baxter tells me that other parties deserve a share of the blame, as well.

"One should also keep in mind that the banking agencies -- the OCC and Fed in particular -- also bear a good deal of responsibility for lapses contributing to the Crisis, and the SEC shares jurisdiction with the CFTC over many financial activities, so the SEC is sometimes unfairly treated as if it alone carries the responsibility to fix everything," he says. "Mary Shapiro had -- and any incoming chairman will have -- an extraordinarily difficult role to play, dealing with a hitherto unsupportive Congress, on the one hand, and various other powerful yet not always agreeable financial regulators, on the other. Intense enforcement will surely be one of the incoming chairman's priorities."

For now, SEC Commissioner Elisse Walter (and a former lobbyist for FINRA) will serve as interim Chair, about which Bart Naylor says he is "not thrilled," though he "want[s] to believe Obama will ultimately name a very strong, sharp-toothed Chair."

Some say the SEC, in addition to being chronically understaffed, has also been hampered by a lack of talent.

Back in 2010, Anthony Randazzo, Director of Economic Research for Reason Foundation, a non-profit think tank with a mission of "advancing free minds and free markets," described the problem.

"At the end of the day, financial markets need to have a regulator to enforce the law and ensure fair competition," he told me. "Even from a libertarian standpoint that is a good role of government. That said, the SEC has proven sorely incompetent, partially because of the inability to attract good talent."

"The best talent overwhelmingly goes to the Wall Street firms themselves, and the second best goes to the regulators," he continued. "So if you're constantly hiring people who didn't get hired by Goldman to regulate the people who did get hired by Goldman, eventually the regulator is going to miss something. Or a lot of things."

A Hopeful Scenario

With the advent of high-frequency trading and the like, Bart Naylor asks: "Has finance become so complex that it's unmanageable, even when it's legal?"

Whether it has or hasn't, he holds out hope that President Obama will ultimately select an SEC Chairman that passes muster as a reformer.

"The hopeful scenario is to look at what Obama has done with the other regulatory agencies," Naylor tells me. "And it's all been good. Tom Curry has been good at the OCC, which was a den of bank sympathy until he took over. And Gary Gensler has been surprisingly aggressive, though we were all a bit worried about the Goldman Sachs connection. I think Obama has calculated that it will be difficult to get economic reforms through a GOP-controlled House; with two-thirds of the Dodd-Frank rules yet to be finalized, it's going to require a zealous SEC Chair."

With all the problems facing the SEC, Naylor does have positive things to say about Enforcement chief Robert Khuzami.

"I don't have any issues with Khuzami," he says. "He seems to be the right profile guy to run the Enforcement Division -- getting Eliott Ness-types is far better than getting TS Eliot-types."

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